Home down payments are always a source of major strain for most buyers. However, you should never give up on your dreams of buying your own home or sacrifice them at the altar of a negligible down payment. You must have heard of the phrase- The early bird catches the worm. It’s the same story when it comes to a home loan as well. Those who start saving and planning for their down payment early on always reap the benefits in a timely manner when they are ready to purchase their homes.
In these scenarios, you should aim at building up a solid corpus and some financial discipline is required. Think of it as your contribution towards building a future asset and security for your family. The earlier you can buy a home, the more sorted your future will be. As a result, the little extravagances and impulse buys can be restricted for a few years until you have the funds that you need. Building some solid savings is definitely par for the course in this regard. However, let not your quest to accumulate the down payment amount do away with your emergency funds and basic savings. This is one mistake that you should never make.
What the ideal scenario feels like
In an ideal scenario, you should have started saving for the down payment early on and managed to accumulate a corpus for this purpose. Also, this will be accumulated and you can pay it at one go without having to dip into at least 4-6 months’ of your net salary income saved for emergencies and basic savings of at least 10-15% of your net income over the years for enhancing your financial footing. If you are investing for future goals, keep those amounts separate as well although experts recommend that more priority be given to buying a home before you go all out with investments.
The aim should be to start saving 20-30% or even more of your net monthly income if you can for your home down payment. You can consider investments of the money saved in avenues which generate good returns but the safest possible way to start is with a fixed deposit. If you have other loans, pay them off and use the money saved every month to contribute to the down payment kitty. If you get an annual bonus or any increment, put that in as well.
Key tips worth considering
Along with saving and investing with a clear goal to pay a particular sum as the down payment for your home, there are other ways and means worth considering-
- Proportionate Release options can only be availed when you have a long-standing relationship with your lender and it is a new project being built by a highly reputed developer. This option will enable customers to make down payments in smaller chunks over a sustained period of time instead of paying the entire sum in one go. The down payment will be periodically paid and the lender will release the loan in phases accordingly.
- If you are really pressed for funds but cannot delay your home purchase any longer, you can consider taking a loan against your provident fund or life insurance policy if that helps. This loan can be repaid conveniently over a certain duration with your accumulated savings and monthly surplus.
- You can also consider unsecured loans like personal loans for making the down payment if you have adequate monthly income and eligibility. However, consider the fact that personal loan interest rates are on the higher side and may pinch your pocket. Go for this option only when your income is high enough to cover all EMIs and give you basic savings without any hassles.
These are some of the ways that you can consider when it comes to making your home down payment. However, nothing beats saving and investing over a sustained time period. This will help you pay a larger sum as the down payment, thereby lowering your interest outgo and the monthly EMI that you would have had to pay otherwise. Consult your financial advisor or experts on achieving a substantial down payment amount from your savings and investments.
Should you make a big down payment?
It is simple logic that a higher down payment naturally lowers the overall interest that you will have to pay. A lower loan amount may also come with a comparatively lower rate of interest. This will also keep your EMIs more comfortable and increase your chances of loan approval since the lender will have to bear lesser risk. You can also save on home loan insurance premiums and processing fees among other costs.
However, some people feel that bigger down payments lead to sizable funds being locked for years, hampering overall liquidity levels and savings. This may even create financial issues in case of emergencies. Home loan principal and interest repayments will get you handsome tax benefits as well. The lower the loan amount, the lower will be the benefits. Also, by making a bigger down payment, many people often find it hard to arrange for subsequent expenditure including registration, stamp duty, interiors, maintenance charges and so on. Yet, it is always advisable to pay as much as possible from your end while taking a home loan. Lower debt levels are always welcome and with a home you are essentially building an asset that will appreciate in value with time.